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Understanding the Legal aspects of
Franchising
David Kaye QFP, Harper Macleod LLP
Our firm in numbers
Tailored services for clients
A selection of our clients
Facts and Figures
– Number of franchise systems in the UK: 901
– Number of franchisee outlets: 44,200
– Number of people employed in franchising: 621,000
– Franchise Industry annual turnover in the UK: £15.1 billion
– 97% of franchisees reporting profitability (including new-start businesses)
– Franchisees’ satisfaction with their franchisor has never been higher (91% saying they are ‘mainly’ or ‘definitely’ satisfied).
Source: BFA Natwest Franchise Survey 2015
Franchising Law
Is there such a thing as “Franchising Law”?
Unlike many other countries worldwide, Franchising is not regulated in the UK. Instead it is governed by the following:
– General Commercial Law (e.g. Contract, Corporate, Property and IP)
– Specific Acts of Parliament (e.g. Trading Schemes Act 1996)
– European and UK Competition Law (e.g. on price fixing and vertical agreements)
– Court Judgements
– The European Code of Ethics for Franchising
– British Franchise Association Guidance
– Best Practice!!
Legal Requirements
• Franchise Documents:
– Confidentiality/Non Disclosure Agreements
– Deposit Agreements
– Franchise Agreements
– Side Letter?
• Trade Mark Registration
– Trademark License agreement
• Operations Manual
– Closely linked to the Franchise Agreement
Key Terms of the Relationship
– Rights Granted
• What is the Franchisee allowed to do?
– Fees:
• Initial Fee
• Management Services Fee
• Product/Service Fees
• National Marketing Contribution
– Term
• How long will the relationship last?
• Franchisee’s Right of Renewal
– Territory
• Where can the Franchisee operate from? Exclusive Territory?
– Targets
• Will the Franchisee be required to meet any minimum performance targets?
Franchisor’s Obligations
– Initial Obligations
• Provide Initial Training
• Provide Start-up Package/Equipment
• Supply an Operations Manual (on loan)
• Assist with Set-up
– Ongoing Obligations
• Ongoing Training and development
• Updates to Operations Manual/Procedures
• Supply products/services to the Franchisee
• Provide a Helpline/Support for enquiries
• Provide Annual Conference/Regional Meetings (at Franchisor discretion)
Franchisee’s Obligations
– Supply Products & Services to Customers
– Recruit, Train and Supervise Employees
– Locate Premises (and take the lease of the premises, if appropriate)
– Vehicles (buy/lease suitable vehicle)
– Intellectual Property, Internet and Social Media (comply with brand guidelines)
– Accounting & reporting Requirements
– COMPLY WITH THE OPERATIONS MANUAL!
Franchisee’s Right to Sell
– Franchisor’s prior consent is required
– Payment of Costs (legal/training)
– Commission on introduction of a Purchaser
– Right of First Refusal – Franchisor can buy the business back (at market rate)
Death/Incapacity of the Franchisee
– Right of a family member (acceptable to Franchisor) to step-in
– Right of the family to find a purchaser (acceptable to Franchisor)
– Buy back/Termination
Termination
– One-sided – normally allowing only Franchisors to terminate. Some suggested grounds for
termination might be:
• Failing to pay sums due
• Material or repeated breach of the Franchise Agreement
• Providing false or misleading information to the Franchisor
• Damaging the Brand
• Failing to obtain Franchisor consent (buying from non-approved suppliers)
• Bankruptcy
• Suspending (or threatening to suspend) business
– Franchisee’s common law right to terminate if the Franchisor is in breach of the agreement
Consequences of Termination
– Franchisor’s right to recover loss (including loss of anticipated earnings)
– Franchisee ceases to trade and ceases use of all Intellectual Property
– Abide by Restrictive Covenants (including “Connected Persons”):
• Non-compete provisions (in the Territory)
• Non-solicitation of employees/suppliers
• Non-solicitation of customers
General Clauses
– Individual’s Guarantee and Covenants
– Indemnity by Franchisee
– Acknowledgements
• No rights to the System
• No guarantee or warranty provided by Franchisor
• Exercising own personal judgement following legal advice
– Entire agreement
– Alternative Dispute Resolution
• Informal meeting
• Mediation
• Arbitration (BFA Arbitration Scheme)
– Governing Law
Role of the BFA
– Trade Body for Franchising in the UK
– Only source of governance for franchising
– Courts have deemed their guidance useful in determining cases
– Why use BFA accredited advisors?
• Many companies claim to be able to help you franchise (particularly online!)
• BFA accreditation helps you to find genuine expertise
What we do?
Act in the UK and overseas for Franchisors, Master Franchisees and Franchisees in relation to:
– Drafting UK and International Franchise Agreements;
– Advising on Brand Protection and Trade Mark Registration;
– Assisting with the Purchase and Re-sale of Franchise Businesses;
– Reviewing and Reporting on Franchise Documentation;
– Advising on structuring a Franchise in the UK;
– Advising on International Expansion through Franchising;
– Advising on Exit and Buy-out Strategies;
– Assisting with Dispute Avoidance and Resolution; and
– Drafting Ancillary Commercial Documentation.
Clients / Franchising Experience
Questions?
